Commentaries (some of them cheeky or provocative) on economic topics by Ralph Musgrave. This site is dedicated to Abba Lerner. I disagree with several claims made by Lerner, and made by his intellectual descendants, that is advocates of Modern Monetary Theory (MMT). But I regard MMT on balance as being a breath of fresh air for economics.

Friday, 28 June 2013

Looks like it was the biggest 100 banks that
started offering “liar loans” willy nilly before the crunch. Vertical axis is delinquency rates, the red line is the 100 largest banks, and the blue line other banks.

One of the main excuses for QE is that things would have been worse without it, which is a bit like saying that on a cold day it’s an idea to burn your furniture on your log fire. After all, the house would be “colder without” burning your furniture.

The latter furniture burning policy of course begs the question as to whether there isn’t a better way warming your house. Likewise, the above QE argument begs the question as to whether fiscal stimulus ins’t better than QE.

Amazing the daft logic employed by Bank of England officials and other members of our elite, ins’t it?

Anyway, QE has been widely ridiculed elsewhere so I won’t say any more about it. Instead, let’s consider the other main element in monetary policy, namely interest rate adjustments.

Recessions have several different possible causes. Let’s take each in turn and see if an interest rate cut makes sense.

A recession could be caused by employers deciding that less investment will be needed in future. I.e. a recession can be caused by a fall in investment spending. If there really is a drop in the total amount of investment needed, then an interest rate cut is not appropriate. I.e. what’s the point in encouraging investment, when less investment is needed?

The best policy is simply to boost consumer spending.

Alternatively, employers might cut investment spending because they think consumer demand in on the wane. In that case the best solution is to make sure consumer demand does not wane!!!

Also, if interest rates are cut in either of the above scenarios, that will boost consumer spending, but it will skew the spending towards durables - a “skew” that will have to be unwound later. So that doesn’t make much sense. And the “skew” is substantial: that is, interest rate cuts have a big effect on demand for durables compared to other forms of consumer goods: see here.

Lags.

A possible argument for monetary policy is the lags are shorter than in the case of fiscal policy, but there does not seem to be much evidence in support of that idea.

An interest rate cut would help there, but it involves the above mentioned “skew”.

And if the root cause of the problem is people’s decision spend less: i.e. their decision to build up their cash holdings (Keynes’s paradox of thrift unemployment) why not supply them with more cash? In MMT parlance, if people’s “savings desires” are not being met, supply them with savings.

If government goes for the “create money and spend more” option, that has an instant fiscal effect: jobs are created. If government goes for the “tax less” option, that also increases household’s stocks of cash. Plus if households see their cash holdings rising towards their desired level, they’ll probably increase their spending immediately to some extent: i.e. they won’t wait till their “net financial assets” have reached the desired level before increasing their spending.

Creating new money and spending it into the economy is really a mix of monetary and fiscal policy. And it’s a policy often promoted by advocates of full reserve banking, e.g. this lot. But it’s certainly not an interest rate cut – though doubtless there will be a finite effect on interest rates.

Thursday, 27 June 2013

In this Financial Times article, Martin Wolf describes bank leverage of 33:1 which
existed prior to the crunch as “frighteningly high”. But then says “I cannot
see why the right answer should be no leverage at all. An intermediary that can
never fail is surely also far too safe.”

The answer
to Wolf’s question is as follows.Reducing the
33:1 to for example the 4:1 suggested by Wolf in a later FT article would
certainly reduce the chance of bank failure to a very low level. And if all we
were concerned with was bank safety, then 4:1 would probably suffice. But there
is another point to consider, which Wolf spelled out in very eloquent form
here.

Money creation. In answer to
the question as to how the credit crunch possible, Wolf says “The answer is
that we have entrusted a private industry with the provision of ….the supply of
money..” To be exact, when a commercial bank lends, it creates money.Or in the
words of Mervyn King, “When banks extend loans to their customers, they create
money by crediting their customers’ accounts.”

In other
words there are good arguments for a system under which only the government /
central bank machine creates money – sometimes known as “full reserve banking”.

And full
reserve is a system that necessarily involves 1:1 leverage. Reasons are thus.If £X of
money freshly created by government is deposited at a commercial bank, and the
bank lends it on, then the commercial bank is creating money, for reasons
spelled out by Mervyn King above. To be exact, once the loan has been made,
both the depositor and borrower consider themselves to be in possession of £X.
So £X has been turned into £2X.

In contrast
(and taking Laurence Kotlikoff’s full reserve system), if the depositor wants
their bank to lend on or invest their money, then under LK’s system, the money
is put into a mutual fund (unit trust in the UK) of the depositor’s choosing.
The depositor then no long holds money: they hold a stake in a mutual fund. And
the value of that fund rises or falls in line with the performance of the
underlying loans or investments.

As distinct
from money that depositors want to have loaned on, there is money to which
depositors want instant access, and which they want to be near 100% safe and
backed by taxpayers. If that money is simply lodged at the central bank (as it
would be under the full reserve system advocated by for example Positive
Money), then no money creation takes place, plus there is very little risk
involved.

Pro-cyclicality.Another
problem with private money creation is that it is pro-cyclical: exactly what we
don’t want.

All in all,
there are good arguments for banning private money creation.

Tuesday, 25 June 2013

This article
in the Wall Street Journal yesterday by Prof. John Cochrane advocated the sort
of banking system which tends to be advocated by full reserve enthusiasts, like
me, Laurence Kotlikoff, etc. That’s a system under which it is plain impossible
for a bank to SUDDENLY fail. Though a slow decline is perfectly possible.

The system
also involves no bank subsidies (though Cochrane didn’t mention that, far as I
can see).

As Cochrane
says, “At its core, the recent financial crisis was a run. . . . In the 2000 tech bust, people lost a lot of
money, but there was no crisis. Why not? Because tech firms were funded by
stock.”

Later he
says, “Runs are a pathology of financial contracts, such as bank deposits, that
promise investors a fixed amount of money and the right to withdraw that amount
at any time.” Spot on.

And: “Institutions
that want to take deposits, borrow overnight, issue fixed-value money-market
shares or any similar runnable contract must back those liabilities 100% by
short-term Treasurys or reserves at the Fed. Institutions that want to invest
in risky or illiquid assets, like loans or mortgage-backed securities, have to
fund those investments with equity and long-term debt. Then they can invest as
they please, as their problems cannot start a crisis.”

Couldn’t
have put it better myself.

Or in the
words of Mervyn King, “…we saw in 1987 and again in the early 2000s, that a
sharp fall in equity values did not cause the same damage as did the banking
crisis. Equity markets provide a natural safety valve, and when they suffer
sharp falls, economic policy can respond. But when the banking system failed in
September 2008, not even massive injections of both liquidity and capital by
the state could prevent a devastating collapse of confidence and output around
the world.”

Or in the
words of George Selgin, “For a balance sheet without debt liabilities,
insolvency is ruled out…”. (That’s from his book “The Theory of Free Banking”
which is available for free online, though I couldn’t find the URL while
writing this post. Doh!)

Non-peer reviewed (or only lightly peer reviewed) publications. The coloured clickable links below are EITHER the title of the work, OR a very short summary (where I think a short summary conveys more than the title).

i) The above is not a complete list in that earlier versions of some papers have been omitted. For a more complete list see here, and “browse by author” (top of left hand column).

ii) 7 deals with a wide range of alleged reasons for government borrowing, including Keynsian borrow and spend. 6 is an updated version of the "anti-Keynes" arguments in 7. 5 is an updated version of 1, which in turn is an updated version of 4.

______________

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Bits and bobs.

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As I’ve explained for some time on this blog, the recently popular idea that “banks don’t intermediate: they create money” is over-simple. Reason is that they do a bit of both. So it’s nice to see an article that seems to agree with me. (h/t Stephanie Schulte). Mind - I've only skimmed thru the intro to that article.________

Half of landlords in one part of London do not declare rental income to the tax authorities. I might as well join in the fun. I’ll return my tax return to the authorities with a brief letter saying, “Dear Sirs, Thank you for your invitation to take part in your income tax scheme. Unfortunately I am very busy and do not have time. Yours, etc.”________

Simon Wren-Lewis (Oxford economics prof) describes having George Osborne in charge of the economy as being “similar to someone who has never learnt to drive, taking a car onto the highway and causing mayhem”. I’ll drink to that.

Unfortunately SW-L keeps very quiet, as he always does, about the contribution his own profession made to this mess. In particular he doesn’t mention Kenneth Rogoff, Carmen Reinhart or Alberto Alesina – all of them influential economists who over the last ten years have advocated limiting stimulus (because of “the debt”) if not full blown austerity.________

Plenty of support in the comments at this MMT site for the basic ideas behind full reserve banking, though the phrase “full reserve” is not actually used.________

Old Guardian article by Will Hutton claiming the UK should have joined the Euro. Classic Guardian and absolutely hilarious.________

One of the first “daler” coins (hence the word “dollar”) weighed 14kg.!!! Imagine going shopping for the groceries with some of those in your pocket, or should I say “in your wheelbarrow”. (h/t J.P.Koning)________

Moronic Fed official reveals that GDP tends to rise when population rises. Next up: Fed reveals that grass is green and water is wet….:-)________

Fran Boait of Positive Money says the Bank of England "has no capacity to respond to a future crisis, and that puts us in an extremely dangerous position." Well certainly there are plenty of twits at the Treasury and at the BoE who THINK responding will be difficult. Actually there's an easy solution: fiscal stimulus, funded (as suggested by Keynes) by new money. Indeed, that’s what PM itself advocates. But it’s far from clear how many people in high places have heard of Keynes or, where they have heard of him, know what his solution for unemployment was.________

The US debt ceiling has been suspended or lifted 84 times since it was first established. You’d think that having made the Earth shattering discovery 84 times that the debt ceiling is nonsense, that debt ceiling enthusiasts would have learned their lesson, wouldn’t you? I mean if I got drunk 24 times and had 24 car crashes soon afterwards, I’d probably get the point that alcohol causes car crashes…:-) As for getting drunk 84 times and having 84 car crashes, that would indicate extreme stupidity on my part. No?________

The US Treasury has the power to print money (rather in the same way as the UK Treasury printed money in the form of so called “Bradburies” at the outbreak of the first World War).________

“Payment Protection Insurance” was a trick used by UK banks: it involved surreptitiously getting customers to take out insurance against the possibility of not being able to make credit card or mortgage payments. UK banks have been forced to repay customers billions. But that’s just one example of a more general trick used by banks sometimes called “tying”: forcing, tricking or persuading customers to buy one bank product when they buy another. More details here on the Fed’s half-baked attempts to control tying in the US.________

The farcical story of economists’ apparent inability to raise inflation continues. As I’ve long pointed out, Robert Mugabe knows how to do that. In fact Mugabe should be in charge of economics at Harvard: he’d be a big improvement on Kenneth Rogoff, Carmen Reinhart and other ignoramuses at Harvard.________

I’ve removed comment moderation from this blog. The only reason I ever implemented it was so as get rid of commercial organisations advertising something and posing as commenters. When doing that I noticed comments were limited to people with Google accounts for some strange reason. Removed that as well. ________

Article on money creation by Prof Charles Adams, who as far as I can see is a professor of physics at my local university – Durham. I can’t fault the first half of his article, but don’t agree with the second half which claims both publically and privately issued money are needed because we have a public and private sector. I left a comment.

Adams is nowhere near the first physicist to take an interest in money creation. Another is William Hummel. These “physicist / economists” are normally very clued up (as befits someone with enough brain to be a physicist).________

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MUSGRAVE'S LAW SOLVES THE FOLLOWING PROBLEM.

The problem. Deficits and / or national debts allegedly need reducing. The conventional wisdom is that they are reduced by raising taxes and / or cutting government spending, which in turn produces the money with which to repay the debt. But raised taxes or spending cuts destroy jobs: exactly what we don’t want. A quandary.

The solution. The national debt can be reduced at any speed and without austerity as follows. Buy the debt back, obtaining the necessary funds from two sources: A, printing money, and B, increasing tax and/or reduced government spending. A is inflationary and B is deflationary. A and B can be altered to give almost any outcome desired. For example for a faster rate of buy back, apply more of A and B. Or for more deflation while buying back, apply more of B relative to A